What the Legal Battle over Zero Emission Credits Means for State Clean Energy Policies
Although energy-related emissions of carbon dioxide rose for the first time in several years in 2018, proponents of clean energy can be excited about long-term clean energy trends, particularly at the state level. A number of newly elected statewide officials in places such as Michigan, Wisconsin, Maine, Illinois, Colorado, and New Mexico are joining colleagues in other states in advancing forward-looking policy proposals to help their states achieve ambitious clean energy goals. The District of Columbia, for example, passed climate change legislation last December that mandates that all of the District’s utility providers generate100 percent of their energy from renewables by 2032.
Currently, more than 30 states have implemented policies and laws designed to speed the U.S. transition away from fossil fuels and toward a clean energy economy. Through these efforts, states are serving as the kinds of policy incubators needed to demonstrate how the U.S. can successfully transition to a clean energy economy. Nevertheless, states are facingpushback in a variety of ways from a less-than-enthusiastic Trump administration and entrenched industry interests that would prefer to either slow this transition or stop it altogether.
A significant obstacle for states has been a federal regulatory regime that threatens state clean energy efforts in areas where regulatory responsibilities appear to overlap. States exercise authority over generation resources (i.e., energy producers), but the Federal Energy Regulatory Commission (FERC) has responsibility for the wholesale markets in which these generators may participate.
These jurisdictional issues have led owners of fossil fuel-fired generation—competitors in the wholesale markets—to challenge state programs that support emissions-free energy sources that could displace coal and natural gas. In one such example, natural gas generators have identified the New York and Illinois Zero Emission Credit (ZEC) programs, which provide subsidies to existing nuclear generators that are at risk for retirement due to market conditions, as a threat to the competitiveness of natural gas-fired generation. After losing in the lower courts, these generators have asked the Supreme Court to take up the cases.
A closer look at the line between state and federal authority
Traditionally, states have determined what types of electricity generating resources are needed in-state, balancing factors such as fuel diversity (i.e., having a variety of types of electric generation) with cost and, increasingly, reducing emissions.
The Federal Power Act—and how courts interpret it—is at the heart of the state-federal jurisdictional divide over energy regulation. The Federal Power Act recognizes state jurisdiction “over facilities used for the generation of electric energy” (with some limited exceptions), while FERC has jurisdiction over “the sale of electric energy at wholesale in interstate commerce.” Traditionally, states have determined what types of electricity generating resources are needed in-state, balancing factors such as fuel diversity (i.e., having a variety of types of electric generation) with cost and, increasingly, reducing emissions. Organized interstate wholesale electricity markets are overseen by FERC and purport to be resource-type neutral.
How the line between state and federal authority is drawn has serious implications for the ability of states to support or incentivize certain types of clean energy production. The challenges to the New York and Illinois ZEC programs could have repercussions for states that want to require utilities to procure renewable generation or set other clean energy targets.
The ZEC programs at issue are consistent with state prerogatives to determine their mix of energy sources as recognized by federal law, a concept that also supports a slew of other state clean energy initiatives. A wholesale market design that selectively values only certain types of energy producers and ignores emissions and environmental factors (and other subsidies) threatens to upset this state-federal balance, putting state clean energy policies—and their accompanying public health and environmental benefits—on the line.
The legal fight over Zero Emission Credits explained
[Generators] allege that these programs “massively distort wholesale markets,” and warn of the possibility that states may choose to implement similar programs for other resources, including renewables.
Electric Power Supply Association v. Star is the Seventh Circuit’s September 2018 decision upholding the ZECs piece of Illinois’s Future Energy Jobs Act. In addition to expanding the renewable portfolio standard and energy efficiency programs, this law created a new commodity, ZECs, to compensate qualifying nuclear generators for the zero-carbon emissions attribute of their generation. The price for each ZEC is tied to the social cost of carbon. Electric power generators and consumer groups challenged the ZECs component of the law.
Detractors argued that the statute unfairly discriminates against power produced in other states and thus runs afoul of the dormant Commerce Clause’s prohibition on state interference with interstate commerce. They also argued that the ZEC program intrudes on FERC’s jurisdiction over wholesale sales of electricity under the Federal Power Act and distorts the outcomes in FERC-jurisdictional organized wholesale markets.
When asked for its view of the case, FERC agreed with Illinois that the ZEC program is not preempted by the Federal Power Act. FERC noted that the program does not require participation in a FERC-jurisdictional market in order to receive ZECs. Instead, the program is “‘targeted’ at an attribute of generation resources over which Illinois has regulatory authority.” Citing an ongoing proceeding before the agency, FERC stated that it would be capable of addressing any impacts of state initiatives on wholesale markets. The Seventh Circuit agreed with the state and FERC.
Later the same month, in Coalition for Competitive Electricity v. Zibelman, the Second Circuit upheld New York’s ZEC program, a component of the state’s Clean Energy Standard to keep nuclear generators online until renewable resources are able to meet a greater percentage of the state’s energy needs. Generators challenging the program argued that it is preempted by the Federal Power Act and in violation of the dormant Commerce Clause.
The Second Circuit disagreed with the complainants. The court held that because these plaintiffs did not claim to own out-of-state nuclear generators, but rather their alleged injuries arose from their use of disfavored fuels, they lacked standing to pursue the dormant Commerce Clause claims. The court also found that, because prices for ZECs in New York are based on the social cost of carbon, not FERC-regulated wholesale prices, and do not require participation in the wholesale market, the program did not distort FERC’s wholesale markets.
On January 7, 2019 a group of generators asked the Supreme Court to review the Secondand Seventh Circuit decisions. They allege that these programs “massively distort wholesale markets,” and warn of the possibility that states may choose to implement similar programs for other resources, including renewables. Several industry and economist amici have filed briefs in support of the petitions.
Supreme Court prospects
If the Supreme Court does agree to hear these cases ... there could be serious consequences for state clean energy programs.
The Supreme Court denies certiorari for the majority of cases put before it, and the odds of review in a case where there is not a circuit split—the case here, as both the Second and Seventh Circuits came to the same conclusion—are even lower. The fact that the U.S. government has already weighed in against petitioners’ preemption arguments makes a grant seem even more unlikely.
If the Supreme Court does agree to hear these cases, however, there could be serious consequences for state clean energy programs. The last time the Supreme Court waded into the state-federal energy policy divide, it unanimously found that a Maryland program to support new gas-fired power plants ran afoul of the Federal Power Act. In its 2016 opinion in Hughes v. Talen Energy Marketing, LLC, the Court observed that Maryland’s program required the subsidized generator to participate in the FERC-jurisdictional wholesale market. The Court specifically said that it was not opining on state programs that incentivize “new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’” The Second and Seventh Circuits each found that the ZEC programs were distinguishable from Maryland’s program because they did not require a generator to bid into the wholesale market and were therefore permissible under Hughes.
Hughes preserves the balance between FERC’s control over wholesale markets and the states’ historical role in regulating generation facilities. If petitioners have their way, the Supreme Court may severely curb the abilities of states to promote clean energy and incentivize new developments—a dangerous proposition.